Only a few generations ago, the average high school graduate dreamed of entering the work force and securing a long-term job following graduation. A high school diploma was a ticket to a good life. Over time, the Associate’s and Bachelor’s degrees, respectively, became the new entry level standard, and dreams were adjusted. Still, higher education remained affordable for the average student who was willing to work to pay for her education. Today, however, fewer and fewer high school graduates are able to cast their dreams of continuing their post-high school education without taking on student loan debt.
The average high school student is inundated with information on student loans, yet they often remain unsure about which voices to trust. FAFSA information packets and misleading online banner ads regarding student loan forgiveness serve only as faint reminders that all student loan borrowers are obligated to repay their debt. In the end, the promise of an education combined with hope leads most borrowers to act without truly considering the consequences. For many students, the options are clear: take on student loan debt to pay for their education or miss the boat entirely.
When I graduated high school, I found myself in this position. Despite having earned a full-tuition academic scholarship and a few other small scholarships, I did not have any means other than student loans to pay for room and board. Since I was ambitiously pursuing what amounted to a triple major, anything beyond working weekends was out of the question. I felt stuck, but I felt I had no other choice but to take a chance in that moment and hope that it would pay off.
For any college student who is considering student loan debt to finance his education, cautious consideration of the potential ramifications is critical. Among several factors, the following three factors should be afforded special consideration by all would-be borrowers.
1. Opportunity Cost of Student Loans
Rising student loan payments represent a growing percentage of the average college graduate’s monthly budget. When I graduated college in 2009, my monthly student loan payment accounted for 11% of my monthly net income. Despite the growth of income sensitive repayment plans, other graduates may face much less favorable repayment terms. This forces many young people to make difficult decisions, including whether to
- invest in their company 401k or pay extra on their student loans and forfeit a company match
- continue renting longer than their parents did in order to pay down their debts
- delay marriage and starting a family due to debt concerns
- seek traditional employment rather than start a business due to lack of start-up funding and income-related concerns
Critics of student lending raise the point that many students are essentially tricked into a leap-before-you-look decision when the time comes to take out student loans. At age 18, most students lack the maturity and financial savvy to understand the long-term ramifications of their decision; at the same time, the industry has no problems with holding students accountable for repaying their debts.
2. Student Loan Debt Default
The impact of student loan debt stretches beyond missed opportunities and dreams deferred. According to a StudentLoans.net study, which ranked all 4,544 schools throughout the United States eligible for federal student loans according to federal student loan default rates, approximately 11.3% of all student loan borrowers default on their student loan obligations.
This statistic is alarming, as default occurs only when a borrower fails to make a minimum required monthly payment for 270 days. Many borrowers are not aware that default comes with severe consequences, including lost eligibility for deferment, wage garnishment, and sometimes severe damage to credit scores.
Though the approach might appear pessimistic to many borrowers, greater consideration should be given to college and university default rate statistics. I’m not advocating a plan-to-fail approach to choosing a university. However, the correlations as revealed in the study between school type and default rates is too clear to ignore. Not surprisingly, the type of school (public vs. private, less than 2 years, 2-3 years, 3-4 years, profit vs. non-profit) is one predictor of potential default likelihood that potential student loan borrowers should consider.
Among several takeaways from the study, the following are noteworthy:
- For-profit schools boasted the highest default rates.
- Public school default rates are higher than those of private schools. *Note: Community colleges are included in public school default rate calculations.
- Students who attended non-degree granting schools were most likely to default on student loans.
- Larry’s Barber College in Chicago, IL held the highest student default rate at 48.9%.
- Many schools maintained 0% default rates.
You can review the study further or download and manipulate the data further here.
3. Interest Rates
Student loan interest rates have faded in and out of the American consciousness for years. Fortunately for current borrowers, the days of 6.5% interest rates on Subsidized Loans are a thing of the past. Despite improved rates over the past few years, would-be borrowers aren’t doing themselves any favors by taking student loans, especially when unsubsidized loans begin accruing interest earlier than subsidized loans.
Interest rates for loans first disbursed on or after July 1, 2016 are as follows (Source – AccessGroup.org):
|Loan Type||2016–17 Interest Rate||2015–16 Interest Rate|
|Direct Subsidized Loans (Undergraduate)||3.76%||4.29%|
|Direct Unsubsidized Loans (Undergraduate)||3.76%||4.29%|
|Direct Unsubsidized Loans (Graduate)||5.31%||5.84%|
|Direct PLUS Loans (Graduate and Parents)||6.31%||6.84%|
To Borrow or Not to Borrow
Though today’s students enjoy favorable student loan rates, a growing job market, and plenty of reason for hope, student loans remain a double-edged sword. All would-be borrowers would be wise to consider their student loan needs and all options before borrowing. The opportunity cost of borrowing to complete higher education can be costly, and as the aforementioned study illustrates, the consequences of student loan default are serious.
Thanks to Drew Cloud at The Student Loan Report for working with me to put this article together.
Do you have student loan debt? Did you consider default rates, interest rates, and other factors before you decided to borrow?